China's Overcapacity Solution Fuels Higher Unemployment Rate

China has laid off hundreds of workers and closed several companies due to overcapacity in the steel industry. (Photo : Getty Images)

China may see a rise in the unemployment rate as it pursues its current path of closing down coal mines and mining companies to solve its problem on overcapacity.

The Asian giant appears to be trading one problem with another as it tackles the growing dilemma on overcapacity and is faced with the consequence of having millions of mining company laborers jobless.

In March, Reuters reported an announcement from China's Premier Li Keqiang starting the entire program of cutting back coal and steel overcapacity.

According to Li, the country would be able to stabilize the value of its currency if it deals appropriately with "zombie" companies.

With that said, Li directed the program's focus on coal and steel industries, which had the greatest number of "zombie" firms to date.

In a report from China Dialogue, Chinese economist Liu Qiang said that the overcapacity was caused by "preferential treatment" from state-backed firms that created unviable "stranded" assets.

Liu said that the subsidies provided to the fossil fuels had caused the country to fall into a distorted fund allocation dilemma.

"Finally, continuing overcapacity and consumption are a waste of public resources," he told the outlet. "Subsidies come from public funds, and that means everyone is paying for them--and low-income groups may pay more than other elements of society."

Consequences

Because of this, China was forced to clear away "zombie" companies in the said industries which--while done with the wellness of the people in mind--is expected to result in consequences for the laborers.

A report from Bloomberg featured the effects of China's order to cut 500 million metric tons or around 9 percent of the country's annual capacity on the black rock of Shanxi Province, which had previously been known for feeding the nation's power plants with electricity.

Since this plan is expected to have concluded and be successful by 2020, Chinese companies have already started letting go of workers in coal companies in March.

One of them, 36-year-old Guo Yi who worked as an accountant for a government-owned coal mining company for 10 years, said he was still lucky that he was able to find another job quickly, albeit one with less benefits than his previous work.

"I'm one of the lucky ones because I've got skills. It's the coal mine workers that are having the tougher time, because they can only do manual work," he said, referring to the 1,200 miners he worked with in the Datong coal hub.

While some may be able to get better jobs, most of the miners are expected to have a difficult time since they have greatly relied on coal mining to feed their families.

"Let's face it, coal mine workers don't have any other skills but to dig up coal from the ground," 40-year-old mining technician named Da told the outlet.